Many Americans don’t choose to spend much of their free time thinking about taxes. In fact, many seem to view taxes as a seasonal obligation that requires attention just once each year.
Unless paying more tax than is required is desirable, proactive tax planning is a very good idea as many opportunities for tax reduction require action in the year preceding the filing of tax returns.
Smart Business spoke with Megan McManus, tax manager at Sensiba San Filippo LLP, to learn what can be done today to reduce the next tax bill.
Why are fall and winter critical times for tax planning?
A person’s tax returns are simply reporting requirements for taxes due from income earned in the prior year. By the time the taxes are owed and filing is required, many opportunities for savings have passed. Now is the right time to plan for next spring’s tax bill.
For individuals, many tax saving opportunities are accessed through employer-provided benefit plans. Most employers provide just one opportunity each year for employees to make changes to their benefit elections and various contributions. Each employer determines its own open enrollment period, but a large number of employers tend to offer an open enrollment at the end of the year, in November or December.
What are some significant opportunities to consider?
Retirement accounts provide one of the most significant saving opportunities available to employees. That’s why it is so important that employees take full advantage of any matching contributions an employer is willing to make to a 401(k) account. Contributing less than the employer match cap is essentially turning down free money.
In addition to traditional 401(k) plans, Roth 401(k) plans are an increasingly popular investment vehicle that is more often being offered to employees by many employers. A Roth 401(k) is very similar to a 401(k), but contributions to the former are made with after tax dollars.
A Roth 401(k) has the same annual contribution limits as a traditional 401(k) — $17,500 this year — but does not have the income limitations imposed on Roth IRAs, meaning higher-income taxpayers can also take advantage of the investment vehicle. Employees are advised to find out before the next open enrollment if their employer is currently offering a Roth 401(k).
What other employer-offered savings vehicles are available to employees?
Savings can also be created by contributing to a health savings account (HSA). These tax-free contributions must be used for medical expenses and any unused balance can roll forward every year. While HSAs are only available to those on high-deductible health plans, a flexible spending account (FSA) is not restricted to just high-deductible health plans.
An FSA does come with one significant catch — it’s a use it or lose it account. Only $500 can be rolled over from year to year, so it’s very important to carefully consider annual contributions.
What are some actions that should be taken now that will likely ensure savings later?
Remember that tax planning is an individual process. What is right for one individual or family may not be right for another. Understanding the opportunities, the current situation and future plans will allow a person to minimize his or her tax liability and maximize wealth.
Before the end of the year, or before the open enrollment period, it’s a good idea to sit down with a tax adviser. With his or her help, a plan can be developed based on individual needs and available opportunities.
Failing to plan now could lead to paying more than necessary next spring.
Insights Accounting is brought to you by Sensiba San Filippo LLP